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Help, the inmates are running the asylum!
Keeble McFarlane
Saturday, July 16, 2011
You have to wonder who is running things in the world these days. Europe is in financial disarray, with the so-called PIGS - Portugal, Ireland, Spain and Greece in the vise-grip of some serious fiscal pliers. Greece has been suffering considerable social unrest, with strikes, demonstrations and congestion in the capital while legislators haggle over how to dig the Mediterranean country out of the impossible debt pit it dug itself into.
Now, Italy - the third-biggest economy in Europe, is in danger of falling into default. Across the Atlantic, things seem hardly any better. President Obama and senior Congressional leaders have been engaging in a dangerous dance over the past number of weeks, getting very close to the edge of another fiscal cliff.
Like those governments across the pond, and many others around the world, the United States operates on credit. Part of the credit most governments work under is provided by their own citizens through promissory notes issued by their central banks. But as governments become more ambitious in their activities, or - as cynics would point out, less careful in managing their affairs - they find themselves more and more indebted to foreign lenders who willingly buy up their bonds and bills. Thus the United States is now more fiscally beholden to outsiders than at any other time in its history.
With easy money pouring in from the richer members of the EU, places like Greece have been living at a much higher level than their economies would allow
With easy money pouring in from the richer members of the EU, places like Greece have been living at a much higher level than their economies would allow
The roots of the economic problems in Europe are a bit different from those in the US, but the effects are similar. Germany is the biggest holder of debt for the Euro-zone, and while it's doing very well, its citizens are fed up with carrying the can and are strangely apprehensive about their future. Germany went through some serious straits of its own when the two parts of the country, separated by ideology after the Second World War, were reunited 21 years ago. The eastern section was far behind the west, which had enjoyed years of growth sparked by the spectacular Wirtschaftswunder (economic miracle) of the 1950s and 60s.
But the Germans ploughed ahead and their economy is now stronger than ever and the country is the second largest exporter in the world, surpassed only by China. A goodly portion of what it exports is sophisticated machinery used to equip factories to make other goods. Germany - along with its old arch-foe, France - was one of the prime movers in the integration of Europe. Backed by their powerhouse economy, Germans have been able to buy up properties in the poorer European countries like Portugal, Spain and Greece and thus skew the economies of those countries.
With easy money pouring in from the richer members of the EU, places like Greece have been living at a much higher level than their economies would ordinarily allow. They have been able to keep putting off the important fiscal steps they should have taken to set their economies on the right track. Now, as the chickens return home, they're having trouble finding a place to roost.
The people of those countries are now facing some stark economic trials and have no idea how long it will take to struggle through this particular crisis. This is a time of trial for the euro, a currency which didn't exist 16 years ago and which in a very short time rose to become the world's second most important reserve currency and the second most traded currency after the US dollar. Add Italy's troubles to the others, and the euro could sustain a serious hit to its value.
But these difficulties pale in the face of the scenario facing the United States. It has a debt ceiling of an astounding 14.3 trillion dollars. But it can't raise that ceiling without authority from the Congress, something prescribed by the US constitution. The Treasury Department has warned that if the Congress fails to increase its borrowing authority by August 2, it will run out of money to cover the country's bills.
From the beginning, right up to 1917, the Congress authorised each issuance of debt separately, but with the US getting into World War I, it modified the way it gave such authority. It established an aggregate limit, or ceiling, on the total number of bonds which could be issued. The last time the ceiling was increased was in February of last year and this January, foreigners held US$4.45 trillion, or 32 per cent of the debt. The largest holders are the central banks of China, Japan and the United Kingdom.
Tunnel vision, ideology above everything else and stubborn bloody-mindedness are the chief characteristics of the nonsense going on in Washington. In the national election last November, 87 new Republican members put that party in the majority in the House of Representatives and propelled John Boehner into the post of Speaker, or majority leader. But these new representatives come from the so-called Tea Party movement, a radical right group who have no appetite for the give-and-take, the horse-trading and compromise of traditional politicians such as Boehner.
These people are adamantly opposed to taxation and want to cut every government programme they can lay their hands on. During his eight years in the White House, George Bush the Second started two wars and established several new bureaucracies under the imperative of national security while ignoring the most elementary principles of economics. He instituted deep tax cuts for the richest Americans - many in the billionaire category - and relaxed the already minimal regulations on the financial houses of Wall Street. The most egregious result is that by a combination of laughably low tax rates, tax loopholes and generous government subsidies, the biggest company in the world, General Electric, pays no taxes.
The biggest items in the US federal budget are the military, health and pensions. The Defence Department got more than $687 billion last year - more than the next 27 countries combined and about one-fifth of the total US budget. Social Security accounted for a further one-fifth while Medicare and Medicaid took up another one-fifth.
President Obama and the Congressional leaders have been meeting almost daily without coming to any agreement while drifting ever closer to the edge Obama has bent over backwards to offer serious spending cuts, allowing the Bush tax cuts to die and the imposition of some new tax increases on the richest. For the Republicans, no deal. The Democrats don't want to touch the pension and health-care programmes for the old and the poor - Social Security, Medicare and Medicaid. Obama is up for re-election next year, and he is seeking to position himself as a centrist in the acrimonious debate between the Tea Partyers, the conventional Republicans and his own base, the Democrats, as well as among the independent voters who are fed up with the nasty partisan posturing in Washington and want some tough action to put the country's finances in order.
In this acrid atmosphere, the influential US financial rating agency, Moody's, put "on review", its triple-A rating on US government debt. This follows by six weeks a similar decision by another agency, Standard & Poor's, which has upped the ante by placing government debt on a credit watch. Moody's put the whole thing into context when it commented testily that it had "expected our congressional leaders to behave badly, but perhaps not the infants they are showing themselves to be".
keeble.mack@sympatico.ca
Read more: http://www.jamaicaobserver.com/colum...#ixzz1SHd5tkF6
Keeble McFarlane
Saturday, July 16, 2011
You have to wonder who is running things in the world these days. Europe is in financial disarray, with the so-called PIGS - Portugal, Ireland, Spain and Greece in the vise-grip of some serious fiscal pliers. Greece has been suffering considerable social unrest, with strikes, demonstrations and congestion in the capital while legislators haggle over how to dig the Mediterranean country out of the impossible debt pit it dug itself into.
Now, Italy - the third-biggest economy in Europe, is in danger of falling into default. Across the Atlantic, things seem hardly any better. President Obama and senior Congressional leaders have been engaging in a dangerous dance over the past number of weeks, getting very close to the edge of another fiscal cliff.
Like those governments across the pond, and many others around the world, the United States operates on credit. Part of the credit most governments work under is provided by their own citizens through promissory notes issued by their central banks. But as governments become more ambitious in their activities, or - as cynics would point out, less careful in managing their affairs - they find themselves more and more indebted to foreign lenders who willingly buy up their bonds and bills. Thus the United States is now more fiscally beholden to outsiders than at any other time in its history.
With easy money pouring in from the richer members of the EU, places like Greece have been living at a much higher level than their economies would allow
With easy money pouring in from the richer members of the EU, places like Greece have been living at a much higher level than their economies would allow
The roots of the economic problems in Europe are a bit different from those in the US, but the effects are similar. Germany is the biggest holder of debt for the Euro-zone, and while it's doing very well, its citizens are fed up with carrying the can and are strangely apprehensive about their future. Germany went through some serious straits of its own when the two parts of the country, separated by ideology after the Second World War, were reunited 21 years ago. The eastern section was far behind the west, which had enjoyed years of growth sparked by the spectacular Wirtschaftswunder (economic miracle) of the 1950s and 60s.
But the Germans ploughed ahead and their economy is now stronger than ever and the country is the second largest exporter in the world, surpassed only by China. A goodly portion of what it exports is sophisticated machinery used to equip factories to make other goods. Germany - along with its old arch-foe, France - was one of the prime movers in the integration of Europe. Backed by their powerhouse economy, Germans have been able to buy up properties in the poorer European countries like Portugal, Spain and Greece and thus skew the economies of those countries.
With easy money pouring in from the richer members of the EU, places like Greece have been living at a much higher level than their economies would ordinarily allow. They have been able to keep putting off the important fiscal steps they should have taken to set their economies on the right track. Now, as the chickens return home, they're having trouble finding a place to roost.
The people of those countries are now facing some stark economic trials and have no idea how long it will take to struggle through this particular crisis. This is a time of trial for the euro, a currency which didn't exist 16 years ago and which in a very short time rose to become the world's second most important reserve currency and the second most traded currency after the US dollar. Add Italy's troubles to the others, and the euro could sustain a serious hit to its value.
But these difficulties pale in the face of the scenario facing the United States. It has a debt ceiling of an astounding 14.3 trillion dollars. But it can't raise that ceiling without authority from the Congress, something prescribed by the US constitution. The Treasury Department has warned that if the Congress fails to increase its borrowing authority by August 2, it will run out of money to cover the country's bills.
From the beginning, right up to 1917, the Congress authorised each issuance of debt separately, but with the US getting into World War I, it modified the way it gave such authority. It established an aggregate limit, or ceiling, on the total number of bonds which could be issued. The last time the ceiling was increased was in February of last year and this January, foreigners held US$4.45 trillion, or 32 per cent of the debt. The largest holders are the central banks of China, Japan and the United Kingdom.
Tunnel vision, ideology above everything else and stubborn bloody-mindedness are the chief characteristics of the nonsense going on in Washington. In the national election last November, 87 new Republican members put that party in the majority in the House of Representatives and propelled John Boehner into the post of Speaker, or majority leader. But these new representatives come from the so-called Tea Party movement, a radical right group who have no appetite for the give-and-take, the horse-trading and compromise of traditional politicians such as Boehner.
These people are adamantly opposed to taxation and want to cut every government programme they can lay their hands on. During his eight years in the White House, George Bush the Second started two wars and established several new bureaucracies under the imperative of national security while ignoring the most elementary principles of economics. He instituted deep tax cuts for the richest Americans - many in the billionaire category - and relaxed the already minimal regulations on the financial houses of Wall Street. The most egregious result is that by a combination of laughably low tax rates, tax loopholes and generous government subsidies, the biggest company in the world, General Electric, pays no taxes.
The biggest items in the US federal budget are the military, health and pensions. The Defence Department got more than $687 billion last year - more than the next 27 countries combined and about one-fifth of the total US budget. Social Security accounted for a further one-fifth while Medicare and Medicaid took up another one-fifth.
President Obama and the Congressional leaders have been meeting almost daily without coming to any agreement while drifting ever closer to the edge Obama has bent over backwards to offer serious spending cuts, allowing the Bush tax cuts to die and the imposition of some new tax increases on the richest. For the Republicans, no deal. The Democrats don't want to touch the pension and health-care programmes for the old and the poor - Social Security, Medicare and Medicaid. Obama is up for re-election next year, and he is seeking to position himself as a centrist in the acrimonious debate between the Tea Partyers, the conventional Republicans and his own base, the Democrats, as well as among the independent voters who are fed up with the nasty partisan posturing in Washington and want some tough action to put the country's finances in order.
In this acrid atmosphere, the influential US financial rating agency, Moody's, put "on review", its triple-A rating on US government debt. This follows by six weeks a similar decision by another agency, Standard & Poor's, which has upped the ante by placing government debt on a credit watch. Moody's put the whole thing into context when it commented testily that it had "expected our congressional leaders to behave badly, but perhaps not the infants they are showing themselves to be".
keeble.mack@sympatico.ca
Read more: http://www.jamaicaobserver.com/colum...#ixzz1SHd5tkF6